revises psa with shagang, page-11

Some info and thoughts about GRR's agreement with Shagang on (a) pellet pricing index and (b) offtake volume.:

METAL BULLETIN 65% FE PELLET INDEX (MBIOI-PT)
This index was introduced in July (the index must have back-dated pricing to April or earlier) and apparently and seems to be the only such index. Cameron Hunt, Metal Bulletin Index MD, claims the MBIOI-PT "reflects the underlying pellet spot market without bias or influence" and was created due to industry requests for such an index. "The pellet market is an increasingly important part of the Chinese market. A significant percentage of global capacity increases will be shipped as concentrate or pellet."
(Source: http://corecommunique.com/?p=734)

Previously, Grange contracted pellet prices with customers using "an IODEX based index pricing mechanism" (Grange FY11 release, Feb 2012).
My interpretation is that Grange/Shagang estimated pellet prices from the fines prices. Today's statement that the new MBIOI-PT "will not have a material effect on previously reported sales revenues" could mean that their IODEX adjustment was fairly close to the MBIOI-PT calculation.

SHAGANG OFFTAKE VOLUME
Previously, Grange sold about 2.1 mtpa to Shagang and Bluescope. I couldn't find the breakdown for Shagang alone, and I seem to recall that Bluescope has reduced its offtake due to its recent troubles. Today's agreement now has Shagang receiving 1.0 mtpa (a little under half of Grange's annual production).

Worth considering how Grange's increasing reliance on market sales will be beneficial. Mehan's main arguments are the "ability to diversify our customer base" and "flexibility to sell into spot price markets.”

First, Grange can potentially hold off market sales when prices dip (such as the IO price tumble in July-Aug). These price dis are particularly damaging to pellet prices -- the pellet price premium falls more than IO prices in soft markets. Grange has enough cash to build inventory and withhold sales of its market-destined product until prices strengthen again. In contrast, I suspect that Grange is required to continue supplying Shagang at those low prices during downturns.

Second, Grange might be able to time some sales during spikes on the spot market. In contrast, Grange gets only averaged spot prices through its agreement with Shagang because the MBIOI-PT is a "tonnage weighted calculation of actual physical transactions."

Third, Grange might be able to sign short-term contracts for slightly above market rates to clients willing to pay a premium for guaranteed supply (compared to spot supply). The Shagang agreement lacks any supply guarantee premium, which might occur in long-term contracts, and/or where the client is a major shareholder.

Please DYOR. these are just my interpretations of information provided and analysis of this news.